Corporate Tax in The United States - Tax Deferral

Tax Deferral

Deferral is one of the main features of the worldwide tax system that allows U.S multinational companies to delay paying taxes on foreign profits. Under US tax law, companies are not required to pay US tax on their foreign subsidiaries’ profits for many years, even indefinitely until the earnings are returned to US. Therefore, it is one of the main reasons that U.S corporations pay low taxes, even though the corporate tax rate in the U.S is one of the highest rates (35%) in the world.

Deferral is beneficial for U.S companies to raise the cost of capital relatively to their foreign-based competitors. Their foreign subsidiaries can reinvest their earnings without incurring additional tax that allows them to grow faster. It is also valuable to U.S. corporations with global operations, especially for corporations with income in low-tax countries. Some of the largest and most profitable U.S. corporations pay exceedingly low tax rates through their use of subsidiaries in so-called tax haven countries. Eighty-three of the United States’s 100 biggest public companies have subsidiaries in countries that are listed as tax havens or financial privacy jurisdictions, according to the Government Accountability Office.

However, deferral tax pushes U.S. companies to make job-creating investments off shore even if similar investments in the United States can be more profitable with absent tax considerations. Furthermore, companies try to use accounting techniques to record profits offshore by any way, even if they keep actual investment and jobs in the United States. This explains why U.S. corporations report their largest profits in low-tax countries like the Netherlands, Luxembourg, and Bermuda, though clearly that is not where most real economic activity occurs.